The pricing of floating rate instruments

Lara Cathcart

Journal of Computational Finance

Abstract: ABSTRACT This paper derives analytical solutions for floating rate instruments in a continuous-time valuation framework when the underlying interest rate is a mean-reverting square-root process. The partial differential equation obtained is solved subject to the appropriate boundary conditions by application of the Laplace transform, which yields solutions involving the confluent hypergeometric functions. The model is also applied to the valuation of callable bonds.

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